What is a trailing stop?

<p id="isPasted">A trailing stop is a type of stop order that automatically adjusts its stop price as the market moves in a favorable direction. This allows traders to lock in profits and protect their investments from market reversals without manually adjusting their stop loss orders.</p><p>Trailing stops only if the price moves favorably. Once it moves to lock in a profit or reduce a loss, it does not move back in the other direction.</p><p>How trailing stops work:</p><p>Trailing stops are typically set as a percentage or fixed-dollar amount away from the current market price. For example, a trader might set a trailing stop of 2% below the current market price. If the market price rises by 3%, the trailing stop will automatically adjust to 1% below the new market price. This will help to lock in the trader's profit and protect them from losses if the market price reverses.</p><p>Trailing stops can be a valuable tool for traders who want to manage their risk and protect their profits. They can also help to remove the emotion from trading, as traders do not have to constantly monitor the market and adjust their stop loss orders manually.</p><p>Benefits of using trailing stops:</p><ul><li><p>Lock in profits: Trailing stops can help traders lock in profits as the market moves in a favorable direction.</p></li><li><p>Protect against losses: Trailing stops can help to protect traders from losses if the market price reverses.</p></li><li><p>Reduce emotion: Trailing stops can help to remove emotion from trading, as traders do not have to constantly monitor the market and adjust their stop loss orders manually.</p></li></ul><p>Drawbacks of using trailing stops:</p><ul><li><p>May miss out on profits: If the market price moves too quickly, the trailing stop may not adjust quickly enough, and traders may miss out on some profits.</p></li><li><p>May not be effective in volatile markets: Trailing stops may not be as effective in volatile markets, where prices can move quickly and unpredictably.</p></li></ul>